Scenario: ABC Corporation's $401($k$)$ Plan Compliance

ABC Corporation sponsors a $401($k$)$ plan to help its employees save for retirement. The company currently employs $100$ workers, consisting of $10$ highly compensated employees $($HCEs$)$ and $90$ non$-$highly compensated employees $($non$-$HCEs$).$ The company's management is committed to ensuring the $401($k$)$ plan passes the nondiscrimination tests, particularly the Actual Deferral Percentage $($ADP$)$ test and Actual Contribution Percentage $($ACP$)$ test.

Employee Demographics and Contributions:

$$ HCEs:

o Each HCE defers an average of $7\%$ of their salary into the $401($k$)$ plan.

o The company matches $50\%$ of HCEs' contributions up to $6\%$ of their salary.

$$ Non$-$HCEs:

o The non$-$HCEs, on average, defer $3\%$ of their salary into the $401($k$)$ plan.

o The company matches $50\%$ of non$-$HCEs' contributions up to $6\%$ of their salary.

Plan Rules and Testing Requirements:

$$ The plan must pass both the ADP test and the ACP test:

o ADP Test: Ensures that the average deferral percentage for HCEs does not exceed the limit compared to non$-$HCEs.

o ACP Test: Ensures that the average contribution percentage for HCEs $($including matching and after$-$tax contributions$)$ does not exceed the limit compared to non$-$HCEs.

ASSIGNMENT QUESTIONS:

$1.$ ADP Test Analysis:

o Calculate the maximum permissible ADP for the HCEs based on the average deferral percentage of the non$-$HCEs.

o Determine whether the current HCE deferral rates $(7\%)$ exceed the permissible ADP limits$.$

o Propose at least two corrective actions the company can take if the ADP test is failed.

$2.$ ACP Test Analysis:

o Given the company's matching contributions $(50\%$ up to $6\%$ of salary$)$ and the current deferral rates, calculate the average contribution percentage $($ACP$)$ for both HCEs and non$-$HCEs.

o Determine the maximum permissible ACP for the HCEs and evaluate if the current plan passes the ACP test.

o Suggest strategies ABC Corporation could use to correct any potential ACP test failures.

$3.$ Plan Improvement Recommendations:

o Provide at least three recommendations to ABC Corporation's management to improve the $401($k$)$ plan's compliance with ADP and ACP tests in the future. Consider incentives, plan design changes, and communication strategies to encourage non$-$HCEs to participate more actively in the plan.

$4.$ Scenario Reflection:

o Discuss the potential impact on employee morale and retention if the company fails to meet the ADP or ACP test requirements and is forced to take corrective actions, such as refunding contributions to HCEs or increasing contributions for non$-$HCEs.